Market pullback should encourage investors to stick a toe in the water

Published 11:27 am, Tuesday, June 5, 2012

Have you taken advantage of the market pullback we have experienced over the last six trading weeks? At one point, from the early-April high, the S&P 500 retrenched nearly 9 percent. Our outlook on the fundamentals in the United States has not changed as the market has fallen. We continue to believe the slow recovery is on track and inflation will not be a problem in the coming 12 months. Full-year 2012 earnings growth appears to be on track for a 6 percent to 7 percent gain over last year. And American companies have figured out how to grow their earnings in a modest economy.

We remain comfortable with our 1,400-1,450 year-end S&P 500 target range. The midpoint represents an 8 percent gain from last Friday's close. In addition, we see good technical support in the 1,280-1,300 area. For investors with a nine-plus-month time horizon, we believe current market levels offer a good entry point. We like it when the fundamentals and technicals line up as they are, in our opinion, right now. The reward-to-risk ration is in the long-term investor's favor, based on our current work.

What could trip up our positive outlook? As is nearly always the case, there are a number of unpredictables that could create headwinds or outright negative reactions in the market. Clearly, the euro-zone sovereign debt crisis is nowhere near a conclusion. Middle Eastern tensions involving Iran and Israel are still brewing. And the U.S. Congress still needs to address the upcoming "fiscal cliff" our economy is approaching with the scheduled expiration of the Bush-era tax cuts and implementation of automatic government spending cuts on Jan. 1, 2013.

When looking at these various issues, one needs to consider the probability of what might actually occur. Yes, Greece might be back using drachmas 12 months from now, and Spain may seek a bailout by year-end. Israel could take military action against Iran, and Congress might not be able to get its act together and extend the current tax rates. The probability of any of these events happening is not zero. Some, like Greece leaving the euro currency or Spain seeking a bailout, would seem to have a higher chance of occurring than others and may be somewhat priced into the market already.

However, one can look over the last 30-plus years of history and come up with good reasons to not own stocks in almost any 12-month period. Yet the stock market made a tremendous run higher over that time as technology, productivity and innovation drove the American economy forward.

Our work suggests business and consumer confidence, along with the labor market, will improve as we move into 2013. Equities should benefit. For those with cash on the sidelines that will eventually go into stocks, we believe it is time to at least stick a toe in the water and begin averaging into the market now.

Past Performance is no guarantee of future results. Portions of this article were produced on May 29, 2012 by Scott Wren, Wells Fargo Advisors Senior Equity Strategist, and provided courtesy of Bhupen Agrawal, Managing Director - Branch Manager of Wells Fargo Advisors' Midland office, at (432) 684-7335. The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy or sell any security, or instrumental to participate in any trading strategy. Additional information is available upon request at (432) 684-7335. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Investments and insurance products: NOT FDIC-Insured NO Bank Guarantee MAY Lose Value